Bank earnings to set the stage

Matt Williams, head of Perpetual Investments, says this reporting season the banks are aware of what’s driven the re-rating of their share prices.
Photo: Tamara Voninski

by
Vesna Poljak

The first of the big four bank profits – and key meetings for central banks in the United States and Europe – will set the direction for the sharemarket this week.

Local equities are poised to open slightly weaker on Monday, with futures pointing to a three-point, or 0.1 per cent, loss for the S&P/ASX 200 Index. The Australian dollar is flat, buying $US1.0275.

Wall Street had a mixed session on Friday, with the S&P 500 down 0.2 per cent and the Dow Jones Industrial Average up 0.1 per cent. Corporate ­earnings overshadowed surprisingly weak economic growth in the world’s biggest economy, which expanded only 2.5 per cent in the first quarter.

Bank stocks have continued their march in 2013, defying concerns that valuations are too expensive relative to the banks’ capacity to grow earnings in the weak domestic credit environment. Households and businesses have failed to significantly increase their borrowing activities in spite of historically low interest rates, preferring to save money.

ANZ Banking Group
kicks off first-half results for the sector on Tuesday, followed by
Westpac Banking Corp
on Friday.
National Australia Bank
reports next week .

The numbers coincide with the S&P/ASX 200 Banks Index, hitting a record high last Wednesday as well as fresh records in the past week for Westpac and
Commonwealth Bank of Australia
, as offshore interest in the big four mounts.

Perpetual Investments
head of Australian equities
Matt Williams
believes the market has a pretty good read on the quality of the banks’ loan books given unemployment is relatively ­stable, and the sector is unlikely to disappoint on that measure. However, the share price appreciation means the stakes are somewhat raised. “When you’re trading at higher than historic averages then if the results are disappointing you can see a severe reaction. However I don’t think that’s really going to be the case. What really kills banks dead is bad debts and at this point in Australia there hasn’t been a very high increase in problem loans," he said.

Mr Williams observed that banks are not just trading steeper than their own multiples implied, but against offshore peers, too. Part of the sector’s appeal has been a track record of consistent and reliable dividend growth that investors have embraced in a yield-focused ­environment. He said that boards would be especially conscious of banks’ status as dividend darlings.

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“I think in this reporting season all the bank management are very aware of what’s driven the re-rating of their share prices, and so I would be very ­surprised to see any disappointment on the dividend front."

Local private credit data due on Tuesday is expected to underscore weak lending trends,
JBWere
chief investment officer
Giselle Roux
predicted. She believed this could fuel calls for a May rate cut by the Reserve Bank of Australia when it meets next week.

In the meantime, the Federal Reserve will disclose the outcome of its two-day meeting on Wednesday, ­followed by the European Central Bank’s meeting on Thursday.

The US GDP reading was evidence that cuts to spending in that economy were having an effect, Ms Roux said.
Amazon
shares were heavily sold off in Friday’s trading, after the online retailer showed a sharp decline in quarter-on-quarter sales, though not all US stocks traded poorly. “If there is a long bow to be drawn from US GDP it’s that the RBA has seen China’s GDP come in below expectations, PMI below expectations, CPI below expectations, Japan easing . . . and I think the bigger debate is going to be ‘is it prepared to undertake an easing in May, just prior to the budget?’," she said.

Traders are pricing in a 39 per cent chance of a one-quarter of a percentage point rate cut at the May RBA meeting.

As for the US and Europe, Ms Roux said central bankers wouldn’t want to be seen departing from ultra-easy ­monetary policy, given global growth is weak. “Europe in particular is looking very ordinary at this point and there’s some uncertainty as to how the Japanese easing will unfold. I don’t think central banks want to be seen to do anything at all, in my opinion. In other words, don’t rattle the cage."